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Present at the Re-Creation

The financial crisis has led to an accountability moment for our economic system. But the most disappointing -- if unsurprising -- realization in what ought to be an era of reform is that so few experts from the world of Wall Street and commerce have stepped forward to offer a transformative vision of the new economy. On the left, brilliant economists and advocates abound, but it is harder to find practitioners whose reforms are inspired by hard-won experience.

Nonetheless, there is a short list of financial-sector reformers whose ideas are gaining more attention. Though they are not all self-identified liberals, their commonsense responses to our economic system seem, in contrast to the status quo, quite radical -- imagine, a consumer-credit system that reflects actual practices or executive pay that reflects performance. The reformers belong to an earlier age of boring but sustainable banking. And while some of their ideas are old-fashioned, they seem refreshingly new to the generation raised to think of investment bankers as infallible "masters of the universe" rather than mere petulant plutocrats.

The broader, mostly unacknowledged mission of these reform-minded men and women is making the case that American capitalism can still secure a future for working people, even as global competition and technological innovation meet a great worldwide recession. "The capital market, and the capital system, is not inevitably or even inherently the enemy of jobs and working people," says Eugene Keilin, an investment banker who perfected the art of the employee buyout. "The techniques we've employed have not just been good for our investors, who represent capital; they've also been good for our employees, too."

The left cannot create a successful model of regulatory capitalism unless the capitalists are convinced to participate, and some signs show that the financiers of the future are starting to take today's lessons to heart. Some MBA students are taking voluntary oaths to be ethical businesspeople, akin to the promises graduating medical students make -- first, do no harm. And surveys suggest more students are entering finance programs with the aim of pursuing social justice. These budding capitalists will need to learn from the handful of forward-thinking financial reformers who know how to move our economy past the days of stagnating wages and popped bubbles.

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The Restructurers

Big Idea: Save the manufacturing industry by ensuring workers get an equal share

When it became clear last winter that the government would need to take drastic action or else see the American automobile industry collapse, taking millions of jobs with it, there was one obvious person to bring aboard: Ron Bloom, whose work restructuring troubled manufacturing firms and leading employee buyouts gave him the perfect skill set to take on a troubled industry that has both a unionized work force and a mountain of debt. He became a key member of President Barack Obama's Auto Task Force, sharing leadership with investment banker Steve Rattner. When Rattner resigned this summer, Bloom took full charge of government efforts to rebuild the auto industry, car czar in all but name.

Bloom owes much to his mentor, Eugene Keilin, who got his start in finance by restructuring the city of New York itself, directing a special agency created to pull the city out of bankruptcy in the 1970s, and following the agency's chair, Felix Rohatyn, to the white-shoe investment firm Lazard Frères & Co. (The press referred to Keilin and Rohatyn as "the Batman and Robin of New York.") In 1981, Keilin was contacted by a union in Weirton, West Virginia, whose employers were shuttering their steel mill. Management told them, either as a stall or a serious offer, that if they could pony up the money, they could buy the mill. The union, which had heard of Keilin's role in the municipal rescue, thought he could help. After months of negotiations, he pushed the employee buyout through. "Nothing like it had ever been done in a company that was half as big as Weirton," Keilin said of the deal.

Bloom joined Keilin at Lazard in the 1980s, after working as a researcher at the Service Employees International Union and getting an MBA at Harvard. Keilin, who was by then a veteran dealmaker, recalls that Bloom "came to Lazard with a union and a business background, wanting to combine the two. That was always his plan." Bloom understood a serious shortcoming of the labor movement: "Companies would come and ask unions to modify agreements in one way or another," Bloom says. "If the union was strong, it would say 'no,' and if it was weak it would say 'yes,' but it would never engage in a problem-solving dialogue looking for solutions where both parties could get better off."

Facilitating that dialogue became Keilin and Bloom's specialty when they formed their own boutique firm in 1990. They rescued manufacturing companies whose owners threatened to sell out and move, which would cut out jobs, pensions, and benefits. Often, their solution was an employee buyout of the firm, tough negotiations with suppliers, cost-cutting, and new union agreements. In 1994, after major successes such as advising unions at United Airlines in an employee buyout and restructuring steel giant LTV, the partners went their separate ways. Keilin would stay in the private sector, launching a private-equity fund, KPS Capital Partners, that invests exclusively in unionized manufacturing firms. One of his partners at the fund, Michael Psaros, is the son of a Wierton Steelworker who recalls collecting change to support the employee buyout Keilin helped engineer.

Bloom went to work for the United Steelworkers (USW). "It was important that we have someone with the kind of sophisticated international understanding of financial markets and how they work," says Leo Gerard, the USW president who recruited Bloom. "He could dismantle a bullshit business plan as quick as you could bat an eye."

Bloom is known as a tough negotiator who pursues what he calls "dentist chair bargaining ... inspired by the story of the man who walks into his dentist's office, grabs the dentist by the balls and says, 'Now, let's not hurt each other.'" It's a style familiar to the bondholders at General Motors and Chrysler, who complained mightily about concessions they faced during those companies' bankruptcies, but Bloom argues that the United Auto Workers and other stakeholders made equal sacrifices. After negotiations led by Obama's Auto Task Force, the two companies' bankruptcies moved through court in record time. Bloom's current task is supervising firms at a distance as they attempt to pay back their main investors, the American taxpayers.

Turning around a long-embattled industry will require much more than experience. Bloom will need luck, innovation, and broader economic recovery to ensure his charges survive. But even given the breadth of the challenge, it's hard to think that taxpayers should give the responsibility to anyone else. "Ron's accomplishment was to be trusted by our members," Gerard says. "In very short order [he could] go into troubled situations and let our members know they had a smart guy on our side."

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The Activists

Big idea: Hold corporations accountable by giving investors a voice.

One thing people tend to forget about public corporations is that they are, technically, publicly owned. In reality, though, shareholders are often too widely dispersed to offer real guidance to a company, and boards of directors -- supposedly the representatives of shareholders -- are tightly tied to company management, with many conflicts of interest. Sometimes, in the case of the title "chair and CEO," they're the same people. Executives assemble a committee of friends and allies to decide their salaries. This doesn't sound so pernicious until you remember that if you are an investor -- or your retirement is invested -- their salaries are your money.

But with the rise of institutional investors, like pension funds, in the 1980s, astute observers saw a chance to bring serious oversight to companies through shareholder activism. One of them was Nell Minnow, who has made a career of keeping an eye on corporate boards. She runs a firm, the Corporate Library, that rates the directors of public companies in an effort to encourage smarter decisions. It's a strategy she maintains is good for businesses, good for stockholders, and good for the overall economy. "One of the biggest symptoms of a bad board is excessive pay," Minnow says. "If you're going to give a pay plan that isn't tied to performance, you're going to get executives that don't care about performance, and that's exactly what happened."

Minnow began her legal career at various government agencies before joining a start-up that advised activist shareholders in 1992. "I don't like bullies," she says. "I'm lucky to be able to say what I think when I see someone I think is a bully." To document her successes, she ticks off a list of board members who have resigned. "When I came into this business, O.J. Simpson was on five corporate boards and an audit committee," she says. "I think that shows how far things have come."

Minnow, a strong advocate of markets that work, has pursued her public-spirited project from within the private sector. Phil Angelides, on the other hand, has had his greatest successes in public service. As California's treasurer in the early part of this decade, he saw shareholder activism, particularly his influence over two large California pension funds controlling hundreds of billions of dollars in assets, as a tool to promote sound corporate governance. He forbade the two funds from working with investment banks that didn't follow strong self-dealing rules to prevent bankers from abusing their positions for personal gain and worked with shareholders across the country to encourage smart executive compensation rules.

"Institutional investors, particularly pension funds, are the best proxy for the public interest," Minnow says. "They are permanent shareholders; they have about 30 years from the day a dollar comes in until the day it has to be paid out. The retirees want the same thing that the public wants: They want to have a sustainable economy, they want to have water to drink, they want clean air to breathe, they want jobs."

Angelides, who has maintained a low public profile since a failed bid for California governor in 2006, has just landed an important new seat. He'll be chairing a congressional commission investigating the roots of the financial crisis, modeled on the famous Pecora Commission that plumbed Wall Street's depths after the Great Crash of 1929 and helped produce the Securities and Exchange Commission. If Angelides can convince the members of this new commission, whose views on the crisis range widely, to work together, they will have a chance to do similarly important work.

Though Minnow has serious concerns about the corporate governance proposals in the Obama administration's financial regulatory reform plan -- such as the toothless proposition that shareholders have a nonbinding vote on executive compensation plans -- she does think two ideas are feasible for the future: require that all directors of public companies are elected by a majority of shareholders (today, many if not most are elected by far less than 50 percent of shareholders) and ensure that all bonuses have clawback provisions, which ensure that executives can't mismanage a firm and, like infamous Countrywide CEO Angelo Mozillo, walk away with $471 million.

Asked if the will to confront the corporations is flagging, Minnow laughs. "Believe me, it isn't over."

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The Realists

Big idea: Protect consumers by creating reality-based regulations.

"Excuse me for interrupting, are you Elizabeth Warren?" a stranger asks at an Au Bon Pain on Capitol Hill. "There should be a 100 more people like you," he tells her and adds, "I'm a common citizen, and I'm really frightened." He has every right to be, given the state of America's economy. Many of the ills of this recession come from consumer-lending practices that have preyed on average borrowers.

Warren, a professor at Harvard Law School, is an expert in -- and an advocate for -- what she likes to call "family economic security." The Obama administration has proposed the creation of a Consumer Financial Protection Agency, an idea that Warren came up with in an influential 2007 journal article. More recently, she has risen to prominence for her hard-headed and clear-eyed assessments of America's economic health as the chair of the Congressional Oversight Panel, which is tasked by Congress to oversee the federal bank-bailout plan.

She eschews ideological labels, content to be called, in her own words, a "cranky Okie" -- a reference to her native Oklahoma and its populist history. Married at age 19, she worked as a teacher for brain-damaged children, then after having a baby, considered engineering. But one Christmas, as she was deciding what to pursue, her brothers (all in law school) encouraged her to follow the same path. She had been, after all, a state champion debater.

After graduating from Rutgers Law, she taught law for several years but would only discover her vocation after Congress passed major bankruptcy reforms in 1978. By this time she was teaching at the University of Houston Law School, and she volunteered to introduce students to the new legislation. "What I began to realize is this statute is a response to a certain set of problems, empirical claims about how people borrow money, why they get into financial trouble, how they try to cope with their difficulties," Warren says. "I looked at that and thought, 'How do you know that? Have you ever been there? Could you ever not pay a bill or had a debt collector call you?' And the answer for the people who had actually done a large part of this work was, 'No.'"

Warren teamed up with another law professor and a sociologist to perform a study examining the realities underpinning the bankruptcy reform -- and came to an unexpected conclusion. "I undertook the first empirical study to show how families were cheating the system. I thought, 'I'm going to do the study and uncover abuse,'" Warren says. "When we got through with the study, and I got a good hard look at the actual facts of bankruptcy, my outlook was never the same. In fact, my personal life was never the same."

Since then, Warren's focus on bankruptcy law, income inequality, and consumer protection has made her a leader in her field. Now, in her role as chair of the Congressional Oversight Panel, she is charged with being the voice of the common citizen in a debate over bank bailouts dominated by CEOs and the elected officials whose campaigns those same CEOs bankroll. She also has been a forceful advocate for the administration's consumer-protection plan, testifying before Congress and even engaging in a testy back-and-forth with Rep. Jeb Hensarling, the Texas conservative who is her colleague on the panel but a staunch opponent of government regulation.

When it comes to implementing a consumer-protection agenda, Warren has a powerful ally in Eric Stein, the Treasury Department official charged with shepherding Warren's brainchild, the Consumer Financial Protection Agency, through Congress. Stein is the first top government official tasked solely with consumer financial issues. And as someone who has been in the business himself, he is uniquely situated to argue against claims, from Hensarling and his allies, that the new regulatory agency will hurt consumer access to credit.

Stein comes to the Treasury from Self-Help, a North Carolina–based nonprofit lender that is affiliated with the Center for Responsible Lending (CRL), the premiere consumer research and advocacy organization. After Stein encountered victims of predatory lending at Self-Help, he saw the need for laws to protect borrowers. In 1999, Self-Help successfully pushed North Carolina to pass a landmark statute to combat predatory lending. Three years later, Stein co-founded CRL.

"People were interested in what Self-Help and CRL had to say because we did $5 billion worth of lending around the country," Stein says. "It's small compared to the larger lenders but enough to give us practical experience and some credibility."

Stein brings a pro-consumer attitude to an administration stuffed with financiers. "My goal working for a nonprofit is the same as working for the government," Stein tells the Prospect, "which is to try to give ordinary folks a fair shake in the credit markets and the financial world."

Warren isn't done fighting, either. "The market is broken," she says. "It so frustrates me that the argument the banks want to advance is that somehow they are the defenders of a strong and working market, and regulation is always bad. Regulations help support markets to make them work."

About the Author

Tim Fernholz is a former staff writer for the Prospect. His work has been published by Newsweek, The New Republic, The Nation, The Guardian, and The Daily Beast. He is also a Research Fellow at the New America Foundation.